Finance
FINANCE 2 ASSINGMENT 2011-2012 Nikesh Hindocha (10044607)
Part A.
Introduction
As part of my assignment, I have been asked to discuss the following statement “Mergers and acquisitions can be value destroyers or value creators”. A merger can be defined as when two equal businesses in terms of profit margin and status, combine in order to become one legal entity. Initially, the fundamental reason for this merge is to produce a company that is worth more than the sum of its parts. An acquisition is where one company acquires a controlling interest in another company. The combination of these unequal companies can produce the same or even more benefits as a merger would. In different cases, these mergers and acquisitions are either considered as the creator of value or the destroyer of value or even possibly both. A company that is considered as a value creator is carrying out their primary value-adding activities in the right manner. In contrast, a company that is seen as a value destroyer does the complete opposite meaning that the company is less appealing to employees, customers and potential investors.
Value Creation
Mergers and acquisitions are formed in the hope that they will create value and there is a vast amount of reasoning on why they have been introduced. Businesses will try and create value for the company, shareholders, customers and employees. The present value of all performance enhancements attributable to management change would result in the increase in value from just by managing the assets more efficiently (Damodaran, 2005).
Horizontal and Vertical Integration of Mergers and Acquisitions
Mergers that are of a large scale may have been introduced in order to occupy a large share of the market, whereas acquisitions may have been formed in order to eliminate the competition. The mobile phone group of the recent merge between t mobile UK and orange UK could be potentially the biggest value creating company of all time.
Part A.
Introduction
As part of my assignment, I have been asked to discuss the following statement “Mergers and acquisitions can be value destroyers or value creators”. A merger can be defined as when two equal businesses in terms of profit margin and status, combine in order to become one legal entity. Initially, the fundamental reason for this merge is to produce a company that is worth more than the sum of its parts. An acquisition is where one company acquires a controlling interest in another company. The combination of these unequal companies can produce the same or even more benefits as a merger would. In different cases, these mergers and acquisitions are either considered as the creator of value or the destroyer of value or even possibly both. A company that is considered as a value creator is carrying out their primary value-adding activities in the right manner. In contrast, a company that is seen as a value destroyer does the complete opposite meaning that the company is less appealing to employees, customers and potential investors.
Value Creation
Mergers and acquisitions are formed in the hope that they will create value and there is a vast amount of reasoning on why they have been introduced. Businesses will try and create value for the company, shareholders, customers and employees. The present value of all performance enhancements attributable to management change would result in the increase in value from just by managing the assets more efficiently (Damodaran, 2005).
Horizontal and Vertical Integration of Mergers and Acquisitions
Mergers that are of a large scale may have been introduced in order to occupy a large share of the market, whereas acquisitions may have been formed in order to eliminate the competition. The mobile phone group of the recent merge between t mobile UK and orange UK could be potentially the biggest value creating company of all time.
References: Bertoncelj, A. (2006) “Corporate restructuring and controlling interest”, Studia Universitatis Babes-Bolyai, Oeconomica, Vol. 51, No.1, pp. 59-73. Bertoncelj, A. (2007) “Balanced Management of Key Success Factors in Mergers and Acquisitions”, Organizacija – Journal of Management, Informatics and Human Resources, Vol.40, No.5, pp. A147-A152. Bruner, R.F. (2004) Applied Mergers and Acquisitions, Wiley Finance, New York. Damodaran, A. (2005) The value of control: implications for control premia, minority discounts and voting share differentials, Stern School of Business, New York. Hassan, M., Patro, D.K., Tuckman, H. and Wang, X. (2007) “ Do mergers and acquisitions create shareholder wealth in the pharmaceutical industry?”, International Journal of Pharmaceutical and Healthcare Marketing, Vol. 1, No. 1, pp.58-78. Weston, J.F. and Weaver, S.C. (2001) Mergers & Acquisitions, The McGraw-Hill Executive MBA Series, New York. Nakamura, H.R. (2005) Motives, Partner Selection and Productivity Effects of M&As: The Pattern of Japanese Mergers and Acquisition, Thesis (Ph.D.), Institute of International Business, Stockholm School of Economics. Shrivastava, P. (1986) ”Post-merger integration”, Journal of Business Strategy, Vol. 7, No.1, pp.65-76